You Decide

To: John and Jane Smith

CC: File

From: Lisa M Feijo, CPA

Date: 08/02/2012

Re: Response to your tax questions

Message:

John and Jane I would like to thank you for coming into my office and I have come up with some answers based on the information that you have given me.

1) John your first question is how the $300,000 will be treated for purposes of tax income. IRS Publication 525 states that you are generally taxed on income that is available to you. The $300,000 will be considered taxable income and should be reported on your LLC.

2) With regards on how to treat the $25,000 for purposes of federal tax income it would follow the same guide lines as the $300,000. IRS Publication 525 states that any income received is considered taxable income when it is available to you. You will have to report the $25,000 at taxable income.

3) Your third question regarding the income is how to reduce the taxable amount of income for both the $300,000 and the $25,000. IRS Pub. 535 states that an individual cannot deduct expenses in advance if paid in advance and the individual must reduce the prepaid expense as it is realized. You can only deduct the expenses for the current year and if you did not write off any expenses from last year you can amend you prior year return. You can reduce your taxable income by investing in a traditional IRA and the IRS Pub. 590 states that you and your wife can open up a traditional IRA in the amount of $5,000 each and you can deduct the contributions to the traditional IRA for the year or the general limit. I would suggest that you open two traditional IRA’s and reduce your taxable income for the year.

1) Jane your first question was about the different tax consequences between paying down the mortgage and assuming a new mortgage for federal income tax purposes. IRS Publication 523 talks about when you sell your home and have a capital gain it would be considered taxable income, unless you pass an ownership and...